Schwinn quoted an FBI report describing mortgage fraud as "pervasive and growing." She said more incidents are being reported to the Mortgage Asset Research Institute, which keeps track of mortgage fraud.

"All indications are that mortgage fraud is up," she told an audience of about 100.

One of the most difficult aspects of dealing with mortgage fraud is that it's hard to know the scope of the problem, according to panelist Arthur Prieston, chairman of the Prieston Group.
George Kimmel George Kimmel, Standard & Poor's

Standard & Poor's Structured Finance Group estimated the annual cost of mortgage fraud in 2003 at 3 basis points, or $1.2 billion, on the record-breaking $4 trillion of mortgage originations that year, according to panelist George Kimmel, associate director of the group. The estimate was based on data from the Prieston Group.

"Though this is a preliminary effort, it's the most robust I've seen yet," said audience member James Croft, founder of the Mortgage Asset Research Institute.

Schwinn recommended four approaches to fighting mortgage loan fraud. "Strengthen pre-funding controls. Get expert help," she advised the audience. Loan officers should be trained on how to better detect fraudulent applications, she said.

Participating in industry efforts to establish a database of fraud incidence can help in tracking, measuring and correcting the problem, Schwinn said. The industry's recognized database for such reports is that of the Mortgage Asset Research Institute, MIDEX, the Mortgage Industry Data Exchange.

Finally, "evaluate the use of fraud insurance," Schwinn advised.

Schwinn also suggested three resources to the group: theMortgage Fraud Against Lenders Resource Center, sponsored by the MBA; the Mortgage Fraud Blog, run by The Prieston Group; and Quality Lenders Review. (Another mortgage fraud resource is a mortgage fraud blog run by Rachel Dollar, a California mortgage fraud attorney.)

Detecting fraudulent loans can be tricky, Schwinn acknowledged. "When you see a fraudulent loan you won't know right away because the applicant is lying," she said.

In answer to a question from the audience, panelists agreed that straw buyers – so-called home buyers who are either victims of identity theft or otherwise fraudulent – are one of the hardest forms of fraud to detect. "Contemporaneous flips are hard, too," said Prieston.

Flipping, or selling a property quickly for a large profit, can be legal. When done dishonestly, it often involves inflated appraisals from dishonest appraisers.

"The shorter the time from origination to default, the more likely it was caused by fraud," Schwinn noted.